Dividends Magnify Your Total Return

Dividends are money in your pocket. As such you can spend or save them in the form of cash. Or you can reinvestment them free of charge to accumulate more shares of a stock. For an appreciating stock more shares mean more money in the long run.

Suppose a stock increases in price on average three percent per year for 40 years. Every one dollar you invest would grow to $3.26. But if the stock paid a two percent dividend and you reinvest them, your annual return would be five percent so one dollar would grow to $7.04. Thus, you could have more than doubled your nest egg by merely checking off the dividend reinvestment option when you purchased the stock.

Posted September 19, 2006.